The Role of Institutional Investors in Corporate Governance

Case of Romania

Cristina Hodea, MBA

THE THIRD SOUTH EASTERN EUROPECORPORATE GOVERNANCE ROUNDTABLEZagreb, 21-22 November 2002

Institutional investors universedomestic financial investment companies- most important and diversified portfolios (5 players)

foreign portfolio investors (7 players out of which 4 have important investments on Romanian capital market)

venture capitalists (10 players, invest mainly in private equity, but have few participation in listed companies; one of the envisaged exit strategies is listing the company)

domestic mutual funds (7 portfolio management companies; mainly invest in money market; tend to increase the investment in capital market)

Institutional investors universeinsurance companies

-most of them invest mainly in Romanian T-bills and bank deposits

-international players prefer to invest in international capital markets

-some examples of :

-Nederlanden has investments in stock of companies listed on BSE

-Unita invests in listed and unlisted tourism companies

-Asirom invests mainly in companies where controlling shareholder has control

Institutional investors universePrivatisation institutions

– special institutional investors – majority, controlling but also minority shareholders;– goal: preserve/increase the value of the company; restructure it in

order to become more appealing to strategic/portfolio investors)– should implement and promote OECD corporate governance

principles where are stakeholders

International institutions (IFC, EBRD, EBRD)Banks prefer less riskier investments No pension fund

Survey respondentsPrivatisation institutions, insurance

companies, international institutions were not subject to the survey

Questionnaires were sent only to managers of institutional investors

70% response rate, over 80% for Romanian financial companies and foreign portfolio investors and only 43% for mutual funds

68% of respondents invest for capital growth, only 28% investing for income generation

76% of institutional investors have an active investment policy

Type of respondents

Romanian financial

investment companies

25%

Venture capitalists

30%

Foreign portfolio investors

30%

Romanian mutual funds15%

Main findings

• The priority in order to strengthen corporate governance should be enforcement of existing laws and regulation while improving legal framework

• 74% of respondents consider lack of experience and precedent in judicial system as well as corruption the main obstacles in enforcing legal framework;

• half of respondents consider insufficient training and expertise of SEC’s staff to deter law enforcement

Main findings

• Respondents consider that the auditors of the company have a moderate contribution in increasing transparency of financial information

• On a scale 1 to 5 (1 - poor, 5 -excellent) the institutional investor evaluate:– representation in the board of directors 2.88– existing accounting standards 2.59– disclosure of information 2.53– fairness in formation of governing bodies 2.53– regulatory framework on investment 2.35

Main findings• All respondents are mainly minority shareholders, although

some have also control and majority participation

• Exit strategies preferred by institutional investors seem to be direct negotiations with other investors and capital market in similar percentages

• 93% of respondents the most important factors in selecting a target are the quality of management and financial issues; payment of dividends is regarded as less important.

• The most important perceived risks are protection of shareholder rights and management competence.

Main findings• 65% of institutional investors declare to have an investor relation

unit able to provide:– financial statements for last semester/quarter,

– information for next shareholders’ assembly,

– inform on material events from last assembly,

– minutes of the assemblies

• over 70% of the institutional investors disclose information about their portfolio monthly or at shorter periods, using traditional communication means or company web site

• all managers have access to the balance sheet and income statement of the institutional investor they work for, but only 84% to the statement at cash flow and shareholders’ equity

Main findings• 75% of respondents consider that the board should include

representatives of majority shareholder, institutional investors and minority shareholders, but also independent experts from the industry.

• 75% know remuneration of board members of institutional investor, in most cases from annual budget

• 86% know the other occupations of board members from CVs presented when they were elected; less than 25% have more current information

• although 77% of respondents have detailed internal rules to avoid conflict of interest, less than 50% know about potential conflict of interest disclosed by board members

Romanian financial investment companies

•5 investment companies born during privatisation process

•closed end funds with millions of shareholders and owning portfolios with hundreds of companies (both majority and minority shareholders)-act in this dual capacity

• maximum stake permitted by the law is 0.1% of share capital

• none of the financial investment companies inform which shareholders reached the 0.1% threshold

•4 have web sites available

Romanian financial investment companies

– all provide on the web sites annual, quarterly reports which include

– financial statements

– budget execution

– structure of portfolio

– lawsuits

– portfolio risk

– 3 provide information on

– company objectives

– dividend payment schedule

– contact person

Romanian financial investment companies

•only 2 inform stakeholders

•who are Board members,

•who manages the company,

•issues discussed and decisions of the shareholders’ assemblies

- only 1 presents:

•information on major transactions•CV of the board and management•remuneration of board members

Romanian Mutual Funds

-Relatively low investment in capital market, as minority and very small investor

-portfolio management companies:1.CERTINVEST - Intercapital2.VANGUARD ASSET MANAGEMENT -FON3.QUADRANT ASSET MANAGEMENT – STABILO, Integro, FDI4.GLOBINVEST – NAPOCA5.ACTIVE MANAGEMENT – ACTIVE Dinamic, Junior, Classic6.CAPITAL ASSET MANAGEMENT - FORTUNA - CLASSIC

- mutual funds web sites reveal the following aspects:

Romanian Mutual FundsNr.Crt.

InvestmentPolicy

Current,periodicreports

Who aretrust/boardmembers

CV board/managementmembers

Boardmembersremuneration

1 X X X X

2 X X X X X

3 X X X X

4 X X X

5 X

6 X XX X X

Romanian Mutual Funds

Portfoliostructure

Riskeness History Investoreducation/guidance

Contactperson

1 X X2 X X X X X3 X X X X4 X X X X56 X X X X

Institutional investors activism• Most institutional investors

– participate to all shareholders assemblies where they invest – are represented in the board of directors and other governing bodies in some

cases – have many court trials when abused by majority shareholders

• Set up in 2000 by most active institutional investors, Romanian Shareholders’ Association has the mission to protect the interests of Romanian Companies' shareholders and to introduce and enforce the OECD principles of corporate governance

• Outlook: new capital market legislation with provisions closer to the

OECD principles and best EU practices